Asset Sales vs. Stock Sale
Asset Sale: a transaction where the purchaser purchases the assets of the business and has no ties to the previous owners business‚ other than acquiring the assets of the selling business. Although the purchaser may purchase the trade name‚ telephone number‚ rights to the lease for the location and customer list (which would make it appear like the same or a similar business)‚ as far as liability is concerned‚ the selling entity and the purchasing entity will be treated as two totally distinct entities‚ legally and financially. The purchaser has no remaining ties to the business other than acquiring the assets.
Stock Sale: a transaction where a third party comes in and acquires the shares of the entity that actually owns the assets and those assets will be transferred by way of stock ownership. For example‚ if your business operates through a corporate entity‚ the purchaser would acquire all of the shares of your company and own all of the assets the corporate entity owns. In most instances‚ the transaction type decided upon between the parties will affect the purchaser of the business more so than the seller of business. The reason being is that the acquisition of another entity’s stock will normally not cutoff liability to the successor entity which could ultimately result in being sued for something the seller did years ago. Most business purchasers prefer to do asset purchases to avoid this.
Effect on Seller
A. Tax Implications – Although the type of business sale transaction is a bigger concern for the business purchaser‚ it nonetheless has an impact on the seller as well. The biggest factor relates to the tax implications between the asset sale and stock sale. Each transaction will be different and each accountant will have a different preference. Before doing anything‚ you should discuss this issue with your accountant and see if there would be a major tax advantage to one or the other methods.
B. Cutting Off Liability – Although it would seem as if the buyer is taking a substantial risk by acquiring the shares of an entity‚ in all likelihood‚ if you sell your business by selling your stock‚ the agreements will likely require you to indemnify (compensate for loss) the purchaser in the event a claim arises in the future.
C. Dissolution After Sale – When selling the assets of a company‚ in most situations‚ you would dissolve the entity following the sale and‚ in most circumstances‚ would cut off liability. Conversely‚ if you sell your stock‚ the operating entity is still “hanging around” which increases the odds something will pop up down the road.
Asset Sales Are a Better Vehicle to Sell Your Business
For the reasons stated above‚ and for a host of other reasons‚ my preference is to sell the assets of your business when it comes time to sell. I believe that it is better to sell your business and dissolve the operating entity to extinguish any liability in the future. Knowing lawyers‚ even if the buyer does something wrong that had nothing to do with you or your business when you were operating it‚ lawyers will sue anybody that may have been involved and force you to fight your way out of it‚ which is not always easy and definitely not cheap. If you were a previous owner of the same entity‚ it is much more likely that you will be served based upon something the purchaser did. I much prefer to limit those instances when possible and would rather the purchaser operate his or her business under a completely different entity that you were never a part of.
Limited Circumstances Where Stock Sales Work
Although asset sales are preferable‚ there are limited instances where stock sales may work better:
- Substantial Tax Advantage – if your accountant advises you that there would be a substantial benefit from doing a stock sale‚ this may persuade you to take the added risk of something negative in the future. In my opinion‚ it would have to ultimately be a substantial benefit for it to make sense.
- Selling to Partner – if you are transferring less than all of your shares to a current or future business partner‚ a stock transfer may be a better option.
- Selling to Family Member – if you are transferring the business to a child or other family member‚ it may be okay to transfer the shares of the business.
- Licenses and Other Benefits – you probably have certain licenses that are attached to your business entity. If another entity were to be taking on your business‚ the business purchasing entity would probably have to start the process from scratch‚ which is not always possible. Likewise‚ you may hold other benefits within your entity‚ such as long term contracts‚ lines of credit‚ etc. that would not be transferrable. As a business seller‚ you should be only willing to do this if you (and not just the purchaser) would benefit from transferring these items. Be sure you work with your attorney to notify the other side to those contracts and cut off any liability that you may have in the event the business purchaser defaults.
For additional information on selling your business‚ you can request a copy of ENDWISE the guide to selling your business with peace of mind by selecting the item below.